SUBSIDIARY

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When one company acquires more than 50 percent of the voting stock of
another company, thereby obtaining control of its operations, the acquired
company becomes a subsidiary of the acquiring company. The acquiring
company becomes the subsidiary's parent company. Together, the
parent and the subsidiary form a corporate affiliation. Sometimes the
parent company is organized expressly for the purpose of holding stock in
other corporations; such parents are called
holding companies.
If the parent owns all of the voting stock of another company, that
company is a wholly owned subsidiary of the parent company. A company may
become a subsidiary through acquisition, or it may be established as a
subsidiary to begin with. Controlling interest in a company's stock
may be obtained through purchasing the
stock
or exchanging it for shares of the parent company's stock. A
company may establish a subsidiary by forming a new corporation and
retaining all or part of its stock.

Companies choose to acquire or establish subsidiaries for a variety of
financial and managerial reasons. From a management point of view,
subsidiaries allow for the advantages of decentralized
management,
where each subsidiary has its own management team. Each subsidiary is
responsible to the parent company on a profit and loss basis. Unprofitable
subsidiaries can more easily be sold off than can divisions of a
consolidated business. Subsidiaries retain their corporate identities, and
the holding company benefits from any goodwill and recognition attached to
the subsidiary's name.

Subsidiaries can be acquired or established with less investment than
would be required in a merger or consolidation. Where a
merger
would require obtaining complete interest in another company, a
subsidiary can be acquired with the purchase of only a controlling
interest in the company. In deciding whether to establish a subsidiary or
a separate operating division, the parent company often takes into account
the funds that could be raised by selling some of the new
subsidiary's stock. There are also tax and other financial
advantages to establishing or acquiring a subsidiary. Parent companies and
their subsidiaries
are considered separate legal entities, so that the assets of the parent
company and the individual subsidiaries are protected against catastrophic
and creditors' claims against one of the subsidiaries. Another
advantage is that the stock in the subsidiary company is held as an asset
on the books of the parent company and can be used as collateral for
additional
debt
financing. In addition, one company can acquire stock in another company
without approval of its stockholders; mergers and consolidations typically
require stockholder approval.

Subsidiaries typically file financial reports on their operations with
their parent companies. While subsidiaries and their parents are
considered separate legal entities for the purpose of determining
liability, they may be considered as a single economic entity for the
purpose of filing financial statements. For tax purposes, the parent
company must own at least 80 percent of the voting stock in another
company in order to be able to file a consolidated tax return. In that
case, the parent company and its subsidiaries are considered a single
economic entity. The tax advantage here is that losses from one subsidiary
can be used to offset profits from another subsidiary and reduce the
overall taxable corporate income on the consolidated tax return. A
significant disadvantage occurs when a company holds less than 80 percent
of the subsidiary's voting stock; in that case separate tax returns
must be filed for the parent and the subsidiary, and intercorporate
dividends become subject to an additional tax.